TechnologyWeb-based/ElectronicThe Future for Electronic Invoicing

The Future for Electronic Invoicing

What is a B2B Network?

In the context of electronic invoicing and trading solutions, buyer-oriented solutions, which focus on assisting buyers as they procure and pay for materials and services, have historically been more successful than vendor-oriented solutions. This is a result of the inherent buyer power of the customer in many markets.

Within web-based buyer-side electronic invoicing solutions, a vendor network is different from traditional one-to-one trading partner connectivity through electronic data interchange (EDI) implementations. By using a vendor portal connected to a network, a number of vendors can connect to several buyers, creating the many-to-many connectivity that defines a web-based trading network.

During the B2B boom of 1998-2001, many start-ups and large firms moved to create ‘marketplaces’ where (in theory) any vendor could connect to any customer, usually within a specific industry, for the exchange of orders and invoices. Most of these efforts failed due to the enormous integration efforts required and the immature state of web technology. Over the past five years, however, a group of buyer-oriented electronic invoicing solutions has slowly acquired individual vendor networks that have real transactions and real value to their users.

Most of today’s buyer-side web-based B2B solutions began as procurement or electronic invoicing software bundled with an integrated network of trading partners. Each partner is enrolled in a vendor portal where they can receive purchase orders and return invoices through file upload or web-form completion. The providers of these solutions (and their early customers) have invested tremendous amounts of capital in building and maintaining these vendor networks. The simple act of getting a vendor enrolled in a network can take multiple telephone calls and e-mails over several days or weeks. Currently, this investment is only shared between members of a particular vendor network and its bundled accounts payable (AP) or procurement buyer solution.

Bundled Networks are Captive Networks

The early market for technology solutions is typically defined by “bundling” in order to deliver an end-to-end product to customers. In this case, the procurement or invoice processing solution is bundled with a vendor portal and vendor enrollment services.

Think back to the early days of the fax machine. Imagine the effect on the usefulness of machines if fax communication formats had been proprietary across hardware vendors. This would have meant that a Canon fax machine would not be able to communicate with a Xerox fax machine. As a result, today we would all have at least two or three different fax machines in our offices with different telephone numbers. Clearly this scenario would have significantly limited the value of having a fax machine. Luckily, the fax machine hardware industry understood the inherent value of interoperability.

Nevertheless, today a similar value limitation exists in the world of B2B networks (see diagram A below). Each B2B network is essentially an island of vendors and buyers with no connection to other networks. If a vendor wants to send an invoice to a buyer enrolled in a different network they must log-in to that network’s vendor portal. Many vendors have more than one vendor portal that they use to submit invoices – this number is growing and is creating redundancy and inefficiency. This is the value limitation inherent in captive networks.

Diagram A: A Captive Network

Unbundling Increases Value

Unbundling the network increases value for all participants by reducing the risk of adoption for both buyers and vendors. In a bundled scenario, buyers are confronted with a highly complex purchase decision. A typical customer might say, “I like the invoice processing software but am I buying into the right network? Unbundling the network from the perspective of the AP processing solution allows vendors to leverage existing network connections. Today, many vendors are confronted by the question:”I’m already connected to one network but do I also need to enroll in the XYZ vendor portal (network) to send invoices to IBM? “Unbundling begins the process of eliminating this question and reducing the costs for vendors to support B2B networks.

How Much Value is Locked in a Captive Network?

In a bundled solution with a captive network, buyers overpay for network connectivity in the form of:

  • Excess vendor enrollment and maintenance fees – vendor enrollment and maintenance is seldom fully leveraged across multiple buyers.
  • Forced paper alternatives – money spent processing paper due to lack of vendor adoption and money spent buying paper-oriented solutions (scanning and imaging paper).

The value locked in a captive network will ensure that over time it will be either replaced or subsumed into an interoperable network regime. For customers of a bundled solution with a captive network, the switching costs are high because getting out of a captive network relationship is difficult as all the vendors must be moved over to the new portal and new business process. This limits the market penetration of electronic invoicing solutions and lengthens the organizational decision cycle depriving buyers and vendors of critical process efficiencies and financial savings.

Transition Steps to Future B2B Connectivity

Enlightened buyers understand that the value of their web-based invoice processing solutions is directly related to the breadth of the B2B connectivity that they can access. Increasing network connectivity options will occur in three steps:

  1. Unbundling the network to increase B2B connectivity. This means that customers will be able to connect to the network that best fits their business processes.
  2. Solution providers will then begin to enable buyers to connect to multiple vendor networks. This will increase the flow of transactions through the combined network.
  3. Ultimately, several networks will be federated into a common network with standards-based interconnections. A federated set of networks will provide the greatest value for both buyers and vendors.

Federated Networks – Future for B2B Transactions

Federated networks bring together two or more existing B2B networks and allow the seamless exchange of trading documents between buyers and vendors from different B2B networks. For example, a federated network will enable ‘buyer B’ enrolled in vendor network XYZ to send a purchase order to ‘vendor K’ in network JKL (see diagram B below).

Federated networks may initially have fewer features than highly integrated solutions but over the next five years the enhanced reach and lower “lock-in risk of a federated network will result in adoption that far surpasses proprietary, captive solutions.

Diagram B: Federated B2B Network

Moving to Federated Networks

Moving to a federated network could be accomplished by just a few vendors coming together to define a simple, standards-based interoperability specification. This specification would define the framework for the exchange of commerce documents between trading partners. The framework would cover items such as:

  • Partner directory:
    • Addressing and routing
    • Document types and transaction sets
    • Value-added services
  • Vendor portal functionality
  • Billing infrastructure
  • Security infrastructure

Each of these items will be carefully addressed using existing web-based standards delivering a significant jump in B2B connectivity for both buyers and vendors.

The Beginning of Federated Networks

Unbundled and federated networks have the potential to unlock significant value for organizations and trading partners. Like most IT evolutions, this potential will only become reality at the request of customers. The good news is that some vendors are already moving in the right direction. Organizations evaluating web-based B2B solutions such as electronic invoicing or AP automation must carefully consider the network vision of prospective vendors and determine which route will offer the greatest return on investment.

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